What is the Flat Rate VAT Scheme?
The Flat Rate VAT scheme is an alternative to the standard VAT scheme which offer businesses that meet certain criteria, a simpler way of accounting their VAT transactions. This was introduced to reduce the administration burden on smaller businesses meaning reducing the need to record the VAT element on purchases and supplies.
What is changing?
At the Autumn Statement on 23 November 2016, the Chancellor of the Exchequer announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs, such as contractors companies who are labour only businesses from April 2017. This will reduce the benefits of the Flat Rate scheme for some firms, but it will still be a simpler way to record VAT transactions.
Who does this apply to?
The government have created a guideline for limited cost traders. Businesses deemed to supply labour only services will have to use the new 16.5% rate under the new rules.
The definition of a limited cost trader is: a business that spends less than 2% of its sales on goods and not services. Amounts spent on goods must not include purchases of the following:
- Capital Expenditure (such as fixed assets, buildings etc)
- food or drink for consumption by the flat rate business or its employees
- vehicles, vehicle parts and fuel (except in the instance a business carries out transport services)
HMRC will provide further guidance on the changes and we will update further as and when they do. Until they do this, it would be worthwhile to review what any changes may mean for you.